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Why rising home prices should worry you

Home prices rose in the 12 months through March by the most in seven years as the recovery in residential real estate gained momentum. The Standard & Poor’s Case-Shiller index, released Tuesday, showed that all 20 cities had posted year-over-year growth for the third straight month.

But don’t feel rich just yet. Rising home prices may be an indication of easy money policy, not strong economic fundamentals. AEI scholar Ed Pinto warned in an op-ed this spring that the Federal Reserve is blowing another housing bubble by keeping interest rates artificially low.

Recent data released by the Federal Housing Finance Agency (FHFA) suggest that the increase in house prices is not being driven by a broad-based improvement in the economy’s fundamentals. Instead, the Fed’s lower rates are simply being capitalized into higher home prices.

If that’s the case, Pinto suggests housing could come crashing down again when interest rates go up. Interest rates could go up sooner as opposed to later based on Chairman Bernanke’s testimony last week.

With real incomes essentially stagnant, this is a market recovery largely driven by low interest rates and plentiful government financing. This is eerily familiar to the previous government policy-induced boom that went bust in 2006, and from which the country is still struggling to recover. Creating over a trillion dollars in additional home value out of thin air does sound like a variant of dropping money out of helicopters.

Will history repeat? When it comes to interest rates, whatever goes down must go up.

Discussion: (3 comments)

I liken the Fed’s actions to the pilot who drops the landing gear while his plane is plummeting straight down from 30,000 feet. All the manuals say you’re not suppose to do that, but at this point he’s willing to try anything. The Fed was charged by the late Senator Humphrey with simultaneously delivering sound money and full employment. At this point they’re willing to try anything.

It’s about time that some SANE person said that high home prices isn’t good. Gee, is it good if you pay twice as much for a house so you can pay twice as much in TAXES? The only time it’s good is if you have an extra house (as I do) and are tired of being a landlord with it. I hope prices double so I can get rid of it BEFORE the newest Bubble bursts!

I think you just answered your own question. If you’re government, yes, it IS good that you pay twice as much for a house so you can pay twice as much in TAXES. Government, like everyone else, acts in its own self-interest.